120
Finance, Accounting and Business Analysis
Volume 7 Issue 1, 2025
http://faba.bg/
ISSN 2603-5324
DOI: https://doi.org/10.37075/FABA.2025.1.10
FACTORS THAT INFLUENCE DIVIDEND POLICY: DO
MACROECONOMIC FACTORS MATTER?
Emmanuel Kwame Doffour
1*
, Emmanuel Boye Asamoah
2
, Isaac Kwadwo Anim
3
,
Eric Agyenim-Boateng
4
Department of Accounting, University of Cape Coast, Cape Coast, Ghana
1
Department of Accounting, University of Cape Coast, Cape Coast, Ghana
2
Department of Accounting, University of Cape Coast, Cape Coast, Ghana
3
Directorate of Finance, University of Cape Coast, Cape Coast, Ghana
4
* Corresponding author
Info Articles
Abstract
History Article:
Submitted 14 March 2025
Revised 11 May 2025
Accepted 29 May 2025
Purpose: This research examines the effects of macroeconomic variables
(money supply, interest rates, inflation, and exchange rates) on the
dividend policies of firms in the Ghana Stock Exchange.
Design/Methodology/Approach: The study employed panel data from
23 Ghanaian firms from 2010 to 2022. To overcome endogeneity and
unobserved heterogeneity, a dynamic two-step difference Generalized
Method of Moments (GMM) was used, employing Stata 15 for the
analysis.
Findings: The findings also show that money supply, interest rates and
inflation have a positive and significant effect on the dividend payout
ratio, while exchange rates have a significant inverse effect on the
dividend payout ratio.
Practical Implications: These results reveal that macroeconomic factors
play a significant part in determining dividend policies in Ghanaian
firms. The study has significant implications for corporate managers in
the formulation of dividend policy, investors in evaluating the dividend
prospects, and policymakers in the realisation of the effects of
macroeconomic policies on corporate finance.
Originality/Value: This research provides significant information on
the relationship between macroeconomic variables and firms’ dividend
decisions in Ghana. It builds on the existing literature by including a
wider set of macroeconomic variables, unlike most previous Ghanaian
studies that mainly focused on firm-specific factors.
Paper Type: Research Paper
Keywords:
Dividend Policy,
Macroeconomic Factors,
Generalized Method of
Moments
JEL: G35, L25
*
Address Correspondence:
E-mail: emmanueldoffour15@gmail.com
1
emeritus.asamoah@gmail.com
2
ianim@ucc.edu.gh
3
eagyenim-boateng@ucc.edu.gh
4
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121
INTRODUCTION
The rationale for establishing a business focuses on clear objectives, notably enhancing shareholders'
wealth by increasing market value (Jensen and Meckling 1976). Shareholder wealth can grow through
dividends and capital appreciation, with dividend policies influencing how profits are distributed. Various
approaches exist, such as fixed payout ratios and regular dividends with special payments (Brigham and
Houston 2013). Research shows that higher risk-averse investor populations correlate with lower dividends
(Akyildirim et al. 2014), while factors like profitability, growth prospects, and external influences like
economic policies also play significant roles (Khan et al. 2018). Recent macroeconomic changes driven by
globalisation and technology are crucial for decision-making in firms, as stock values fluctuate with interest
and inflation rates (Fredrick 2021), affecting both immediate returns and future growth (Kanwal and
Nadeem 2013). Black (1976) highlighted the lack of strict guidelines on dividend payments versus
reinvestment, leaving ongoing questions about dividend policies.
The anchor theory, based on the bird-in-hand theory, suggests that economic uncertainty may drive
investors to prefer immediate returns (Frankfurter and Wood 2002). Additionally, the Arbitrage Pricing
Theory, introduced by Ross (1976), emphasises that multiple factors can influence investment return
strategies. Ghana's economy has shifted from agriculture to a more diverse post-colonial landscape, with
growth in manufacturing, services, and finance since the Ghana Stock Exchange's inception in 1990
(Kolavalli et al. 2012; Bokpin 2011). In developing countries like Ghana, dividends are key for reliable
income and financial stability, especially in economic instability (Marfo-Yiadom and Agyei 2011). Macro-
environmental factors, often beyond a company's control, such as high inflation and rising interest rates, can
negatively affect corporate earnings and dividends (Adelegan 2009; Ghafoor et al. 2014). The capital market
is influenced by GDP growth, inflation, and trade (Kaimba 2010). International firms face challenges from
exchange rate fluctuations, impacting costs and stock returns (Zghidi et al. 2016).
Taxation and government spending also affect profits and dividend capacity (Appiah-Kubi et al.
2021), while political fluctuations lead to reduced dividends during uncertainty (Montes and Nogueira
2022). Dividends are critical for firms and shareholder returns, particularly in Ghana, where limited
investment opportunities create challenges in balancing regular dividends and reinvestment for growth
(Bossman et al. 2022; Enyan 2009). Although research on global dividend policies is extensive (Rój 2019;
Kaźmierska-Jóźwiak 2015), the specific impacts of macroeconomic factors in Ghana remain under-
explored, especially regarding high inflation, exchange rates, and rising interest rates, which can constrain
dividend capacity (Abor and Bokpin 2010).
This study uniquely analyses the effects of macroeconomic factors, namely, money supply, exchange
rates, interest rates, and inflation, on dividend policy for financial and non-financial firms in Ghana, as these
factors exert cross-sectoral impacts that affect firms regardless of industry or sector. Also, both were
incorporated to increase data variation and sample size which enhances statistical power and robustness in
a GMM analysis as well as generalisation. The research aims to fill a gap in understanding the impact of
these variables, with specific objectives to assess how each factor influences dividend policy..
LITERATURE REVIEW
Theoretical Review
Bird-in-hand theory
The dividend irrelevance argument is contested by the Bird-in-Hand Theory, which was first proposed
by Gordon and Lintner in the 1960s. It highlights that investors would rather have the assurance of dividends
than the uncertainty of potential capital appreciation (Gordon 1963). According to Baker and Powell (1999),
this uncertainty makes shareholders value an amount of anticipated dividends more highly than a dollar of
anticipated stock appreciation. Additionally, the theory posits that dividend payments reduce investor
uncertainty, leading to a lower discount rate for dividends compared to potential capital gains (Gordon and
Shapiro 1956). The theory suggests that a higher dividend payout ratio corresponds with increased stock
valuations, as investors favour the immediate certainty of dividends (Gordon 1959). Moreover, it highlights
that macroeconomic volatility heightens the preference for immediate cash returns, influencing corporate
dividend decisions during unstable times (Frankfurter and Wood 2002). Thus, firms may strategically
increase the dividend payout ratio when facing greater economic uncertainty.
Arbitrage pricing theory (APT)
APT, established by Ross in 1976, explains asset returns as a linear function of multiple
macroeconomic factors. This theory posits that investment returns are influenced by various factors related
to future dividends and discount rates (Shrestha and Subedi 2014). It assumes that systematic risk
characterises project portfolios and that while some risks can be diversified, pure risks do not exist in this
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process. However, the model has limitations, including uncertainty about which factors determine
individual assets (Ross 2013). It assumes a perfect market, which is unrealistic in practice (Dhrymes et al.
1984), and acknowledges that different stocks may respond differently to various risks (Chen et al. 1986).
The APT correlates investment returns with discount rates and future dividends (Mukherjee and Naka 1995),
while also providing an understanding of corporate planning (Burmeister and Wall 1986). APT includes
multiple macroeconomic factors that significantly influence return on securities (Ross 1976) unlike CAPM
which includes only market risk (Roll and Ross 1980). This theory can be used to explain how these factors
affect dividends paid as a return on share securities.
Conceptual Review
Money supply
According to Agarwal et al. (2018), money supply represents the total amount of monetary
instruments in an economy, including cash and demand deposits. It is a crucial macroeconomic indicator
influencing spending, inflation, and investment. An increase in money supply typically leads to lower
interest rates, making borrowing cheaper, which can boost corporate profits and dividend distributions.
Conversely, a decrease in money supply raises interest rates, reduces spending, and negatively impacts
earnings, forcing firms to retain earnings for uncertain economic conditions (Mankiw 2021; Mishkin 2007).
Friedman and Schwartz (2008) argue that money supply is essential for economic growth; a higher money
supply correlates with growth, while a decrease signals a slowdown. The link between money supply and
dividend policy is mediated by factors like liquidity, capital structure, and economic conditions. When
monetary policy favours abundant money and low interest rates, firms can finance growth and enhance
dividends (Blanchard and Johnson 2017). Research by Tran et al. (2019) and Mbaka (2022) indicates that
changes in money supply significantly impact firms’ dividend decisions, with expansions allowing for
increased dividends and contractions leading to reductions
Interest rates
Interest rates are a crucial factor in economic activity, affecting the cost of savings and investment.
High interest rates lead to high capital costs and reduced capital expenditures, while low rates encourage
borrowing and investment. For firms, interest rates heavily influence funding costs and potential returns on
investment (Buckley 2013). Additionally, interest rates signal economic conditions, inflation expectations,
and monetary policy shifts (Blanchard et al. 2015). High rates can decrease profitability as firms often lower
dividends, whereas lower rates reduce capital costs, stimulate economic growth, and allow for higher
dividends (Baker and Wurgler 2013).
Exchange rate
Exchange rates are crucial for currency conversion and significantly impact import and export prices
as well as international investments (Madura 2018). They consist of a base (local) currency and a foreign
currency; for example, in the USD/EUR, USD is the base currency. Exchange rate systems fall into two
categories: floating and fixed. In a floating system, currency values change according to supply and demand,
as noted by Krugman and Obstfeld (2009). Conversely, a fixed exchange rate ties a currency to another
currency or commodity (like gold) and requires central banks to maintain constant rates, providing stability
for international transactions but necessitating large foreign exchange reserves (Frankel 1999). The choice
between systems depends on an economy’s characteristics and monetary policy goals. Floating rates offer
flexibility, while fixed rates provide stability. Research by Pan et al. (2007) shows that exchange rate and
stock price volatility can vary based on the adopted system, affecting firms' risk management strategies.
Inflation
Inflation, as described by Salim (2019), refers to the overall rise in prices of products and services,
often driven by rising expenses like wages and raw material costs, as well as heightened demand exceeding
supply. High inflation can impact a company's dividend strategy by decreasing the purchasing power of
money, which in turn affects costs and revenues (Basse and Reddemann 2011). Increased operating expenses
can reduce gross profits, leading firms to retain more earnings for reinvestment rather than distribute
dividends. During periods of low inflation, companies may pay higher dividends (Kauffman et al. 2016) due
to fewer high-return investment opportunities Theissen et al. 2023). Ultimately, firms must consider both
current and expected inflation rates when formulating their dividend policies to maintain shareholder
confidence, as noted by Basse and Reddemann (2011).
Dividend policy
According to Samrotun (2015), dividend policy involves the trade-off between the dividend payout
ratio to investors and retaining earnings for control over funds. While management may lower dividends to
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123
retain more capital, investors often perceive high dividends as a sign of firm efficiency (Sutrisno 2009). The
dividend signalling theory suggests that higher dividends indicate better company performance, influencing
investor perception (Pamungkas et al. 2017; Jogiyanto 2003). Ultimately, dividend policy outlines the
amount of the total earnings distributed versus reinvested (Brealey et al. 2014). Balancing a high dividend
payout ratio with sufficient retained earnings for reinvestment is a key challenge for firms.
Empirical Review
Rinanda (2022) studied the impact of macroeconomic factors on the dividend policies of
manufacturing companies listed on the Indonesian Stock Market (IDX) during the global health crisis.
Focusing on food and beverage firms with reports from 2012 to 2016, the research used multiple linear
regression through EVIEWS software. Surprisingly, changes in currency exchange rates, inflation rates, and
interest rates did not significantly affect the firms' dividend policies. Also, Mbaka (2022) examined the
influence of macroeconomic factors on dividend distribution among companies in Nairobi from 1987 to
2021, analysing the data with SPSS. The results showed money supply and exchange rates had a significant
direct effect (β = 0.310 and β = 0.317, p = 0.000 < 0.05), but inflation had a positive yet insignificant effect
(β = 0.009, p = 0.501 > 0.05).
Khan et al. (2018) used annual data from 2001 to 2017 to analyse macroeconomic indicators and
dividend payout ratio with OLS. They found that exchange rates positively correlated with the dividend
payout ratio, while interest rates and inflation had a negative relationship. Tran et al. (2019) also studied
money supply and dividend policies in Vietnamese non-financial companies between 2008 and 2017. Their
findings indicated that money supply positively impacted dividend policies, especially during the global
financial crisis.
Yakubu (2019) studied factors influencing the dividend policies of listed banks in Ghana from 2006
to 2015. The analysis revealed that domestic macroeconomic instability, indicated by inflation, had an
insignificant direct impact on these policies. Basse and Reddemann (2011) analysed dividend policies in the
U.S. Their results suggested a positive effect of inflation on dividends paid out. Romus et al. (2020) studied
how macroeconomic factors, particularly GDP and the interest rate, influence dividend policies. They
measured firm performance through ROA and analysed a sample of 10 out of 48 companies in real estate
on the IDX. The study found that GDP growth positively affected firm performance and dividend policy,
while the interest rate had no significant impact. Moreover, firm performance positively influenced dividend
policy.
The empirical studies discussed in this paper give a general picture of the macro environment and
dividend policies in various countries and at different periods. Rinanda (2022) noted that macroeconomic
factors had a limited impact on Indonesian dividend policies, while Mbaka (2022) found a direct association
between money supply, exchange rates, and dividend payments in Kenya. Khan et al. (2018) reported that
exchange rates positively affected Pakistan's dividend policies, but interest and inflation rates had negative
effects. Tran et al. (2019) similarly showed that money supply positively influenced dividend policies in
Vietnam.
Conceptual Framework
Figure 1 shows the impact of macroeconomic factors on a firm's dividend policy. The dependent
variable, dividend policy, is influenced by these macroeconomic variables. The study also accounts for
various firm-specific factors, including size, age, profitability (measured by ROA and ROE), retained
earnings, and cash reserves, as these elements also play a substantial part in shaping the company's dividend
policy. (Rinanda 2022; Yakubu 2019; Marfo-Yiadom and Agyei 2011; Ghafoor et al. 2014; Tran et al. 2019)
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Source: Authors’ Compilation
Figure 1. Conceptual framework
RESEARCH METHODS
The study examined a sample of 10 financial and 13 non-financial companies listed in Ghana that
provided annual statements from 2013 to 2022. A quantitative approach was employed to gather
secondary data. Data on macroeconomic variables were obtained from the annual reports of the Bank of
Ghana, while information regarding the dividend payout policy was obtained from the statements of the
firms in focus.
The dependent variable was dividend policy. The independent variable, encompassing
macroeconomic variables, was assessed through money supply, inflation, exchange rates, and interest rates.
The analysis also controlled for firm-specific variables, including firm size and age, as well as leverage,
profitability (measured by ROA and ROE), retained earnings, and cash holdings. A summary of the
variables, their measurements, and empirical justifications is presented in Table 1.
Table 1. Measurement of variables
Variable
Justification
Dividend Policy
Haider et al. (2012), Ajide and Aderemi
(2014), and Marfo-Yiadom and Agyei
(2011)
Money Supply
Nyamu (2016)
Interest Rate
Issahaku et al. (2013)
Inflation Rate
Baba and Nasieku (2016) and Issahaku et
al. (2013)
Exchange Rate
Willy (2012) and Issahaku et al. (2013)
Firm Size
Elamer and Benyazid (2018)
Firm Age
Nzekwe et al. (2021)
Return on Assets
Zyadat (2016); Jan et al. (2019); and
Buallay (2019)
Return on Equity
Zyadat (2016); Jan et al. (2019); and
Buallay (2019)
Leverage
Sumaira and Amjad (2013)
Retained Earnings
Tran et al. (2019)
Cash Holdings
Marfo-Yiadom and Agyei (2011) and
Tran et al. (2019)
Source: Authors’ Compilation
Macroeconomic Variables
Money Supply
Interest Rate
Inflation Rate
Exchange Rate
Control Variables
Firm Age
Firm Size
Leverage
Return on Assets
Return on Equity
Cash Holdings
Retained Earnings
Dividend Policy
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The study adopted a panel design because the data structure was of time series (years) and cross-
sectional (firms). Based on this structure, the two-step system GMM by Blundell and Bond (1998) was
used. The model used is as follows:


=

+


+
 

+
 

+
 

+


+


+


+


+


+



+



+󰌕

(1)
Where:
β = Regression coefficient
i= each Firm
t= time dimension (years)
󰌕 = Error term
RESULTS AND DISCUSSION
The descriptive analysis of the data gives a general outlook of the major variables of interest
(macroeconomic factors, dividend policy and firm-specific factors).
Table 2. Descriptive statistics
Variable
Obs.
Mean
Std. Dev (SD)
Min
Max
Dividend Payout Ratio
299
0.234
1.455
-20.29
13.166
Money Supply
299
4.716
0.338
4.136
5.256
Interest Rate
299
0.191
0.061
0.113
0.361
Inflation
299
0.151
0.117
0.079
0.541
Exchange Rate
299
0.323
0.183
0.117
0.679
Firm Size
299
5.907
1.092
2.762
8.396
Firm Age
299
46.565
24.427
6
126
Leverage
299
0.747
0.251
0.049
1.947
Return on Assets
299
0.056
0.115
-0.603
0.635
Return on Equity
299
1.032
17.317
-14.96
298.516
Cash Holdings
299
0.116
0.096
0
0.456
Retained Earnings
299
0.016
0.344
-1.572
0.821
Source: Authors’ Compilation
Descriptive Statistics
The average of the dividend payout ratio variable is 0.234, which shows that, on average, firms remit
a small proportion of their earnings as cash as dividends. The high standard deviation (SD) of 1.455 indicates
a high volatility in the dividend behaviour of firms, with the highest payout being 13.166. The minimum
value is negative (-20.29), which indicates that some firms paid dividends even in the years that they realised
losses. Money supply showed an average of 4.716 with an SD of 0.338, ranging from 4.136 to 5.256. The
interest rate averages 19.1% with a standard deviation of 0.061, ranging between 11.3% and 36.1%. The
inflation rate has a mean of 15.1%, which indicates a moderately inflationary environment with a standard
deviation of 0.117, ranging between 7.9% and 54.1%. The exchange rate variable showed an average of
0.323 and an SD of 0.183, which ranges from 0.117 to 0.679.
Regarding the analysis of the firm size, the mean value is 5.907 with an SD of 1.092. The mean firm
age is 46.565 years, meaning that most of the firms in the sample are established firms and have been in
operation for a long time. The SD of 24.427 demonstrates a high variation in the ages of firms, from the
youngest being 6 years to the oldest being 126 years. The leverage variable has a mean of 0.747 with an SD
of 0.251, implying some variation in the level of debt, although the leverage ratio varies between 0.049 and
1.947.
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The mean for the ROA is 5.6% with an SD of 0.115, ranging between -0.603 and 0.635. The ROE
showed an average of 1.032 and an SD as high as 17.317, ranging between -14.96 and 298.516. Cash holdings
has a mean of 11.6% of total assets with an SD of 0.096. Lastly, retained earnings have a mean of 0.016 and
a standard deviation of 0.344, ranging from -1.572 to 0.821.
Correlation Analysis
The correlation investigates the strength and direction of relationships between dividend payout ratio
and various macroeconomic and firm-specific variables while ensuring there are no multicollinearity issues.
The correlation between the dividend payout ratio and money supply is a weak negative at -0.049. The
relationship with interest rates is slightly positive at 0.056, while inflation has a modestly stronger positive
correlation at 0.087. The exchange rate shows a weak positive correlation of 0.064. For firm-specific
variables, firm size shows a negligible correlation with a dividend payout ratio of 0.004 and firm age at 0.021.
Leverage has a low negative correlation of -0.040, while ROA has a weak positive correlation of 0.044.
Interestingly, ROE shows a near-zero negative relationship at -0.007. Cash holdings correlate positively with
the dividend payout ratio at 0.073, and retained earnings show a low positive correlation of 0.100.
Among macroeconomic variables, money supply has a strong inverse correlation with the exchange
rate at -0.949. The relationship between interest rates and inflation is high at 0.874, indicating that rising
inflation tends to lead to higher interest rates, supporting central bank policies. Money supply and inflation
correlate positively at 0.472. In firm-specific variables, leverage shows a significant negative correlation with
ROA at -0.521, while retained earnings and leverage have a negative correlation of -0.699. Conversely,
retained earnings and ROA correlate positively at 0.569, implying profitable firms can retain more earnings
for growth or dividends. The pairwise correlation matrix reveals that no correlation coefficients among the
independent variables exceed 0.90 (except for money supply and exchange rate), demonstrating that
multicollinearity is not an issue in this analysis. Also, the study separates the macroeconomic variables in
different models to help mitigate multicollinearity issues.
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Table 3. Pairwise correlations
Variables
Dividend
Payout
Ratio
Money
Supply
Interest
Rate
Inflation
Exchange
Rate
Firm
Size
Firm
Age
Leverage
Return on
Assets
Return on
Equity
Cash
Holdings
Retained
Earnings
Dividend Payout
Ratio
1.000
Money Supply
-0.049
1.000
Interest Rate
0.056
0.444
1.000
Inflation
0.087
0.472
0.874
1.000
Exchange Rate
0.064
-0.949
-0.451
-0.398
1.000
Firm Size
0.004
0.245
0.111
0.120
-0.235
1.000
Firm Age
0.021
0.153
0.064
0.070
-0.143
-0.041
1.000
Leverage
-0.040
0.147
0.105
0.111
-0.133
0.157
-0.121
1.000
Return on Assets
0.044
-0.142
-0.065
-0.052
0.162
-0.085
0.174
-0.521
1.000
Return on Equity
-0.007
-0.019
0.024
0.001
-0.011
-0.007
-0.026
0.071
-0.025
1.000
Cash Holdings
0.073
0.139
0.092
0.083
-0.135
0.284
0.150
-0.039
0.172
-0.051
1.000
Retained
Earnings
0.100
-0.165
-0.094
-0.109
0.152
-0.058
0.265
-0.699
0.569
-0.066
0.277
1.000
Source: Authors’ Compilation
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Regression Results
The GMM analysis covers four different models, and each model includes different macroeconomic
variables to explain their impact on dividend payout, controlling for firm characteristics. The following
observations can be made.
Table 4. Dynamic panel-data estimation, two-step difference GMM
(1)
(2)
(3)
(4)
VARIABLES
Dividend
Payout Ratio
Dividend
Payout Ratio
Dividend
Payout Ratio
Dividend
Payout Ratio
L.Dividend Payout Ratio
-0.420***
-0.508***
-0.557***
-0.421***
(0.0484)
(0.0546)
(0.0574)
(0.0277)
Money Supply
39.84***
(13.33)
Interest Rate
7.612**
(3.254)
Inflation
4.168**
(1.911)
Exchange Rate
-15.61***
(3.389)
Control Variables
Firm Size
19.08*
32.92***
29.91***
10.87**
(10.09)
(11.25)
(9.100)
(5.270)
Firm Age
-4.805***
-2.261***
-2.030***
-0.997***
(1.547)
(0.513)
(0.350)
(0.363)
Leverage
17.79
18.75
16.07
36.10***
(13.65)
(17.78)
(18.84)
(11.37)
Return on Assets
-22.62***
-36.04***
-37.64***
-9.294*
(8.657)
(8.650)
(7.945)
(4.899)
Return on Equity
-0.00667
-0.00717
-0.00562
-0.0100**
(0.00499)
(0.00777)
(0.00789)
(0.00396)
Retained Earnings
49.48***
68.67***
61.57***
61.56***
(18.22)
(20.56)
(20.26)
(13.39)
Cash Holdings
-0.385
-19.56
-26.78*
-11.53***
(7.472)
(13.88)
(15.31)
(4.251)
Diagnostics
Wald chi2
9043.54
960.96
949.24
2706.04
Prob > chi2
0.000
0.000
0.000
0.000
AR(1) z
-0.97
-0.84
-0.86
-1.14
AR(1) Pr > z
0.331
0.399
0.387
0.254
AR(2) z
1.45
1.58
1.42
1.17
AR(2) Pr > z
0.146
0.114
0.156
0.242
Sargan chi2
0.88
0.52
0.57
2.24
Sargan Prob > chi2
0.990
0.998
0.997
0.896
Hansen test of overid chi2
7.15
5.24
5.03
6.87
Hansen test of overid Prob > chi2
0.307
0.514
0.539
0.333
Hansen test excluding group chi2
2.05
2.32
2.22
1.76
Hansen test excluding group Prob > chi2
0.358
0.313
0.329
0.415
Instruments
15
15
15
15
Observations
253
253
253
253
Number of Firms
23
23
23
23
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Source: Authors’ Compilation
In the analysis of the four models, the lagged dividend payout ratio variable (L. Dividend Payout
Ratio) shows a significant negative coefficient, ranging from -0.420 to -0.557. This indicates that firms with
higher past dividend payout ratios tend to reduce current payouts, confirming at the 1% significance level (p
< 0.01) that past behaviour influences current dividend policies. In Model 1, the coefficient for money supply
is positive (39.84, p < 0.01), suggesting that increased liquidity leads to higher dividends. Model 2 shows a
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129
positive and significant coefficient for interest rates (7.612, p < 0.05), indicating that rising interest rates
compel firms to offer higher dividends to attract investors. Model 3 reveals a positive and significant
coefficient for inflation (4.168, p < 0.05), suggesting that firms may increase dividends to counteract
inflation's impact on purchasing power. Model 4 displays a negative coefficient for the exchange rate (-15.61,
p < 0.01), indicating that currency depreciation leads to a reduced dividend payout ratio.
Firm size has a consistently positive effect on dividends across all models, with coefficients ranging
from 10.87 to 32.92, while younger firms show a negative correlation with dividends. Leverage is positively
linked to dividend policy but is significant only in Model 4 (36.10, p < 0.01). ROA inversely affects dividends
(coefficients from -9.294 to -37.64), suggesting firms retain profits for reinvestment. ROE has a significant
negative coefficient in Model 4 (-0.0100, p < 0.05), indicating that higher returns lead to profit retention.
Retained earnings positively impact the dividend payout ratio across all models (49.48 to 68.67), suggesting
firms with ample retained earnings can pay dividends. Lastly, the relationship between cash holdings and
dividends is negative and significant only in Model 4 (-11.53, p < 0.01), indicating firms favour retaining
cash for operations rather than distributing it.
Model Diagnostics
The study results using two-step difference GMM for dynamic panel data are presented, focusing on
model diagnostics to assess credibility and soundness. Key diagnostics include Wald Chi-square statistics,
autocorrelation tests, and over-identification tests. The Wald Chi-square statistic indicates a good model fit
with p-values (p < 0.001), suggesting that the variables effectively account for variations in the dividend
payout ratio. The AR(1) and AR(2) tests reveal no significant autocorrelation, reinforcing the model's
validity. Moreover, Sargan and Hansen's p-values greater than 0.05 indicate the instruments used are valid.
Discussion of results
Effect of the money supply on dividend policy (Model 1)
The positive and highly significant association between money supply and dividend payout ratio
(coefficient: 39.84, p<0.01) observed in this study aligns with the studies done by Tran et al. (2019) and
Mbaka (2022). A study by Tran et al. (2019) on Vietnamese firms also confirmed our findings. Likewise,
Mbaka’s (2022) analysis of companies in Nairobi established that money supply has a direct and significant
impact on the dividend payout ratio (β =0.310, p<0.000). Taken together, these papers imply that expansion
in money supply results in higher dividend payments, perhaps because of enhanced liquidity in the economy.
Effect of interest rates on dividend policy (Model 2)
The positive and significant effect of interest rates on the dividend payout ratio (7.612, p<0.05) is
somewhat different from some of the previous studies. Khan et al. (2018), in their study on Pakistani textile
firms, also revealed that interest rates have a negative, insignificant impact. In the same way, Romus et al.
(2020) also stated that the interest rate had no significant impact, and Rinanda (2022) also found the same
thing. Contrary to these findings, our results indicate that in the Ghanaian context, higher interest rates may
increase the dividend payout ratio, possibly as a way of attracting investors. This could be due to differences
in economic environments, as those previous studies were done in Asia.
Effect of inflation on dividend policy (Model 3)
The positive and significant relationship between inflation and dividend payout ratio (4.168, p<0.05)
observed in this study corresponds to some of the previous studies but not others. In their study of the US
firms, Basse and Reddemann (2011) noted that inflation has a positive impact, which is consistent with this
study. However, our findings are different from Yakubu (2019), who established that while inflation has a
positive impact on the dividend policies of the listed banks in Ghana, the impact is insignificant. In the same
regard, Mbaka (2022) found a positive but insignificant correlation between inflation and dividend payout
ratio in firms in Nairobi (Kenya). It is rather surprising that our results differ from Yakubu’s (2019), given
that both works examine Ghana, indicating that the connection between inflation and dividend policy may
be contingent on the sector or period under consideration. Our use of GMM estimation instead of Yakubu’s
pooled OLS and fixed/random effects models could also explain the differences in the results. Furthermore,
Yakubu only focused on banks from the year 2006 to 2015.
Effect of exchange rate on dividend policy (Model 4)
The negative and highly significant effect of the exchange rate on the dividend payout ratio (-15.61,
p<0.01) is in contrast to some of the earlier studies. Mbaka (2022) established a positive and significant
correlation between exchange rates and dividend payout ratio (β =0.317, p<0.000) for companies in Nairobi
(Kenya). In the same regard, Khan et al. (2018) found a significant and positive correlation between
exchange rates and the dividend payout ratio in the Pakistani textile industry. Contrary to these findings,
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our results indicate that in the context of Ghana, currency depreciation results in lower dividend payments.
This also differs from the findings of Rinanda (2022), whereby currency exchange rates have an insignificant
impact on the dividend policies of Indonesian manufacturing firms during the global health crisis.
CONCLUSIONS, RECOMMENDATIONS, AND IMPLICATIONS
The purpose of this study was to investigate how macroeconomic variables affect the dividend policies
of firms in Ghana. The findings indicate that these factors significantly influence the dividend payout ratio;
specifically, money supply, interest rates, and inflation are positively related to dividend payments, while
exchange rates have a negative impact. The positive correlation between money supply and dividends
suggests that increased liquidity can enhance dividend distributions, indicating that monetary policy
expansions may benefit shareholders. Conversely, higher interest rates appear to encourage firms to raise
dividends to attract investors, countering the returns on fixed-income assets. Additionally, firms may use
dividends as a hedge against inflation, thereby maintaining the purchasing power of shareholders to cover
the shareholders’ purchasing power erosion to maintain the value of cash dividends. In contrast, currency
depreciation reduces profits and limits cash available for dividends, prompting stricter dividend policies.
This is particularly relevant for multinational corporations and foreign investors evaluating opportunities in
Ghana amid exchange rate fluctuations.
We recommend that corporate managers consider these macroeconomic factors when devising
dividend policies and that investors factor them into their assessments of firms' dividend capacity. This
research adds to the existing works on dividend policy in Africa. The study's limitation is its concentration
solely on Ghanaian firms, which may affect the generalisability of the results. Further studies could compare
these findings with those from other regions. Also, future research could explore how macroeconomic
factors interact with firm characteristics and corporate governance systems to influence dividend strategies.
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